Do You Really Need a Non-Compete Agreement?

Non-compete agreements are under fire lately, raising several questions about whether or not they go too far in restricting employees. The Massachusetts Senate advanced a bill in July that would limit the time period of a non-compete agreement to just three months. The bill also redefined “garden leave,” meaningthe practice where an employee leaving a job is directed to stay away from work during the notice period, while still remaining on the payroll.

The Masachusetts bill would require companies to pay a departing employee his or her full salary during this non-compete period.

Non-competes, which ban workers for a period of time from taking jobs with competitor companies, certainly, are not uncommon. A May 2016 report from the White House cited research estimating that 30 million American workers (18 percent) were covered by non-compete agreements. Even more U.S. workers, according to the research -- roughly 37 percent -- have worked under a non-compete agreement at some point during their career.

So, why the common use of these contracts? Some employers find them necessary to protect their company from potential damage -- especially the leaking of trade secrets. Yet opponents of non-competes consider them unfair to employees and say they impose harsh restrictions on competition and innovation.

Should you consider ditching your own non-compete contract? Ask yourself these three questions:

Does the employee actually have access to trade secrets?

How common is it for employees to have access to trade secrets, anyway? Overall, only 24 percent of workers, according to the White House report, said that they possessed trade secrets. Yet that’s not stopping today’s organizations from furnishing non-compete contracts. When it comes to employees who have signed non-competes, fewer than half report having access to trade secrets.

What is the real reasoning, then, behind many non-compete agreements? Companies everywhere are familiar with non-disclosure agreements, and non-competes give these agreements more teeth -- an added precaution. But non-competes can have serious consequences for employees, by unfairly limiting their options for future employment.

When trade secrets really are a concern, using non-compete agreements may be valuable. Think partners, executives and other key personnel who can take customers and resources with them. However, for lower-level associates who don’t have trade secrets, non-compete agreements may not be worth the trouble. These legal contracts are designed to protect high-profile information, not restrict employee mobility -- as some sources have found.

Can the contract be enforced in your state?

Most states recognize and enforce several variations of a non-compete agreement, but what about those states that don’t? In several states, non-compete agreements aren’t enforceable, while in other states, they canbe enforced only if they adhere to strict requirements.

For example, 19 percent of California workers are bound by non-competes, a rate slightly higher than the national average, the White House report found. However, non-competes are not enforceable in that state.

In short, companies that insist on having their employees sign these contracts can’t use them in a legal setting. Essentially, California businesses employ them as a scare tactic, attempting to retain staff and restrict their growth.

Always focus on the purpose behind why your company supplies these clauses. If the agreement can’t be enforced, what’s the point? Does the agreement have a purpose? Or does it just complicate things for employees?

Before drafting non-compete agreements, review your state laws to make sure the contract meets necessary requirements. Once agreements are legally enforceable, use them responsibly and limit the terms. The goal is to protect the business without harming employees.

Is the contract itself reasonable?

Overly broad non-compete agreements can do more harm for employees than good for employers. For example, in terms of geographic region or time frame, these contracts need limits. Be specific about these factors. If your contract is too vague, job-seekers may be forced to eventually leave your industry entirely and struggle to take the next step in their careers.

Strong-arming employees into contracts that force them to stay or threaten to push them out of an industry is just bad business. Consider using non-compete agreements only for higher-level associates to protect your business' assets and value. If employees are signing even though they lack access to vital information, consider your company’s reasoning.